Share-based compensation plans

Total share-based compensation recorded by the Company during the three and nine months ended September 30, 2016 and September 30, 2015 by line item is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Cost of sales	$	7.9		$	6.0		$	15.5		$	6.0
Research and development	14.4			9.4			33.4			21.0
Selling, general and administrative	24.9			4.6			49.1			28.5
Integration and acquisition costs	26.7			—			170.7			—
Reorganization costs	—			6.7			—			15.3
Total	73.9			26.7			268.7			70.8
Less tax	(26.9		)	(7.5		)	(73.2		)	(19.5		)
	$	47.0		$	19.2		$	195.5		$	51.3

The table above includes pre-tax expense during the three and nine months ended September 30, 2016 of $45.4 million and $191.7 million, respectively, related to replacement and other awards held by Baxalta employees as further described below. This includes integration related expense during the three and nine months ended September 30, 2016 of $22.1 million and $160.5 million, respectively, from the acceleration of unrecognized expense associated with certain employee terminations.

Share-based compensation plans that existed as of December 31, 2015

Prior to February 28, 2015 the Company granted stock-settled share appreciation rights (“SARs”) and performance share awards (“PSAs”) over ordinary shares and ADSs to Executive Directors and employees under the Shire Portfolio Share Plan (“PSP”) (Parts A and B). Since February 28, 2015 the Company has granted awards under the Shire Long Term Incentive Plan 2015 (“LTIP”). Under the LTIP the Company grants stock-settled SARs, restricted stock units (“RSUs”) and performance share units (“PSUs”) over ordinary shares and ADSs to Executive Directors and employees.

These plans and the underlying share-based award grants pursuant to the plans as of December 31, 2015 are further discussed in the Shire 2015 Form 10-K.

Replacement Awards Issued to Baxalta Employees

In connection with the acquisition of Baxalta and pursuant to the merger agreement associated with the acquisition, outstanding Baxalta equity awards held by Baxalta employees or employees of Baxter were cancelled and exchanged for Shire equity awards. The replacement Shire awards generally have the same terms and conditions (including vesting) as the former Baxalta awards for which they were exchanged. The value of the replacement share-based awards granted was designed to generally preserve the intrinsic value and the fair value of the award immediately prior to the acquisition.

Total replacement awards issued to Baxalta and Baxter employees on June 3, 2016 pursuant to the merger agreement were 22.2 million options and 3.9 million RSUs.

The following table presents additional information regarding the replacement options issued as of June 3, 2016:



(options and aggregate intrinsic values in thousands)	Options*	Weighted-average exercise price		Weighted-average contractual term (in years)	Aggregate intrinsic value
Issued and outstanding	13,290	$	43.12	7.69	$	242,467
Vested and exercisable	5,691	$	40.72	6.12	$	117,453
*Number of awards are stated in terms of ordinary share equivalents

Following the acquisition, the Company records share-based compensation expense associated with the acquisition-date fair value of acquired Baxalta employees’ replacement options and RSUs that is attributable to post-acquisition service requirements, as well as share-based compensation expense for post-acquisition service requirements associated with certain remaining unvested Baxter share-based awards held by the acquired Baxalta employees. The portions of the acquisition-date fair values of the awards that are attributable to post-combination service are recognized over the remaining service period of the awards.

The weighted-average acquisition-date fair value and Black-Scholes assumptions related to replacement options issued to acquired Baxalta employees was as follows:



	As of June 3, 2016
Risk-free interest rate	1.20		%
Expected dividend yield	0.35		%
Expected life	3.9 years
Volatility	29.1		%
Fair value per Option*	$	79.31
*Pro rata portion of the fair value recognized as expense related to post combination service period

Total unrecognized expense related to the replacement options issued to acquired Baxalta employees as of September 30, 2016 of $46.7 million is expected to be recognized over a weighted-average period of 1.3 years. Total unrecognized expense related to the replacement RSUs issued to acquired Baxalta employees as of September 30, 2016 of $72.0 million is expected to be recognized over a weighted-average period of 1.9 years.

(number of RSUs in thousands)

Weighted average grant date fair value**

Issued and Outstanding

*Number of awards are stated in terms of ordinary share equivalents

**Reflects the pro rata portion representing future compensation as of June 3, 2016